The Supreme Court decision in The Ocean Victory

1. More than a decade has passed since the now infamous ship allided with the breakwater at Kashima, grounded and then eventually broke in two, having tried to depart the port during severe conditions.

2. The severity of the conditions at Kashima was predominantly due to the coincidence of two phenomena: a long swell and gale-force winds from a direction against which the breakwater offered no protection.

3. Neither of these phenomena was unusual, individually. However, the evidence before the court at first instance pointed to their coincidence being extremely rare.

4. Three issues were put before the Supreme Court.

i. The first issue concerned whether there had been a breach of the safe port undertaking(s). Specifically: (i) was the port safe within the meaning of the warranty; and (ii) did the conditions at the port amount to an abnormal occurrence1?

ii. The second issue concerned whether, if the charterer was in breach of the safe port warranty, the insurer (as assignee of the rights of the demise charterer) was entitled to recover the insured value of the ship from the charterer (who, in turn, would recover from the sub-charterer).

iii. The third issue was whether or not the charterer(s) could limit their liability under the 1976 Convention2.

5. As it happened, the finding on the first issue, that the port was safe, rendered it unnecessary to address the remainder. However, the Supreme Court nevertheless did so, variously citing the importance of the issues.

First issue

6. Lord Clarke (the former Admiralty Judge) gave the only judgment on this issue, having received the full agreement of Lords Hodge, Mance, Sumption and Toulson.

7. The Supreme Court found that: (i) the port was safe; and (ii) the conditions amounted to an abnormal occurrence. In doing so, the Supreme Court found that the Court of Appeal had reached the correct conclusions and for the right reasons – although, candidly, Lord Clarke admitted at first to questioning whether the Court of Appeal should have interfered with the first instance decision (of the incumbent Admiralty Judge).

Foreseeability and the unitary approach

8.At first instance, the Admiralty Judge had concluded that the combination of the long swell and northerly gale was not an “abnormal occurrence”, because: the separate components were characteristics of the port, there was no reason why the two should not occur at the same time, and it was “at least foreseeable”3 that this would occur at some time and “nobody could be surprised if it did”.

9.By contrast, the Court of Appeal found that the correct approach was ‘unitary’ in nature4, such that the event under consideration was the combination of both characteristics. Further, they held that the orthodox approach did not involve an enquiry as to foreseeability: that an event was theoretically foreseeable did not make it a characteristic of a port.

10.In his judgment, Lord Clarke confirmed the Court of Appeal’s approach regarding the unitary question and that the term ‘abnormal occurrence’ must be given its ordinary meaning such that it was an event that was ‘out of the ordinary course and unexpected’ and ‘something which the notional charterer or owner would not have in mind’.

11.More particularly, Lord Clarke agreed with the Court of Appeal that the first instance judge had taken the words of Mustill J (as he then was) regarding ‘foreseeability’ in The Mary Lou out of context. Mustill J had not sought to establish an alternative test based on (minimum or theoretical) foreseeability, and to do so might lead to “wholly unreal and impractical results”. The orthodox approach to deciding whether an event was ‘abnormal’ necessarily includes consideration of past occurrences, their frequency and the likelihood of future occurrence.

12.The decision on the first issue may not come as a surprise to many, after the Court of Appeal’s decision and reasoning, but no doubt it brings some welcome reinforcement.

Safe systems

13.Lord Clarke included5, by way of postscript, recognition of the arguments made (on behalf of the owners) that the port lacked a “proper safe system” to address the possibility of the two characteristics combining. However, in his view, while the enquiry “may be relevant in some cases, the question remains whether the event…which led to this casualty was an abnormal and unexpected occurrence or not”.

Second issue

14.This issue turned on whether the demise charterer was liable to the head owner under the bareboat charterparty; and, more particularly, on the construction of, and relationship between, the standard Clause 12 (of the Barecon 89 form) and the additional Clause 29, in which the safe port warranty was given (there being none in the standard form).

15.The majority (3-2) determined that the insurer (Gard) was not entitled to recover from the charterer. The essential difference between their Lordships was whether or not standard Clause 12 was a complete code6, so as to preclude any claim from the head owner against the demise charterer for breach of additional Clause 29.

16.Lords Hodge7, Mance and Toulson determined that it was. Lords Clarke and Sumption disagreed, both considering that the effect of such finding would make additional Clause 29 almost redundant.

17.Lord Sumption, in particular, suggested that while additional Clause 29 appeared to be “an elaborate trading warranty”, the majority’s construction would have reduced it to a right for “the head owners to protest if they happened to learn in advance of the demise charterer’s intention to visit an unsafe port”8.

18.While in Lord Sumption’s view this undermined the majority’s construction, Lord Toulson had no difficulty accepting that the purpose of additional Clause 29 was indeed limited to “setting limits upon the employment of the ship”.

19.The majority followed the Court of Appeal’s reasoning that it could not have been the intention of the head owner and demise charterer, as joint insureds, to allow claims between each other, or that the insurers could bring a subrogated claim in the name of the head owner against the demise charterer. Lord Mance considered that “under a co-insurance scheme like the present, it is understood implicitly that there will be no such claim”.

20.By contrast, Lord Sumption was certain that, by “adding clause 29 to the printed form, the parties must have intended that in relation to loss or damage arising from the unsafeness of ports, the liability of the charterers and the insurers would coexist”9.

The insolvent insurer

21.In support of his reasoning, Lord Sumption posed the question as to what would happen if the insurer did not pay, in particular due to its own insolvency.

22.For Lord Sumption this eventuality supported his view that it was only the payment of the insurance proceeds, in satisfaction of the head owner’s loss, which discharged the liability of the demise charterer to the head owner.

23.However, the majority were not persuaded of the utility of this question. Lord Mance viewed the proposition as “a remote eventuality which cannot be a guide to the meaning of Clause 12” and Lord Toulson expressed the view that “it is not reasonable to suppose [that this] was in the minds of the BIMCO drafters of Barecon 89 and ought not to affect its core interpretation”10.

Other means to recover

24.What was made particularly clear in the judgments of Lord Sumption (at para. 94) and Lord Mance (at para. 124), was that there were two other bases by which the demise charterer might have pursued its claim against the charterer at first instance. These were:

i.as a bailee (with possessory title), accounting to the head owner for any recovery exceeding the demise charterer’s actual loss; and

ii.on behalf of the head owner, under the principle of transferred loss, where any recovery would be held on trust by the demise charterer for the head owner11.

25.In the event though, Gard did not seek to expand upon its position at first instance, and so these possibilities were not explored further by the Supreme Court. However, the potential to avoid the finding in respect of the second issue has been clearly signposted by these additional dicta.

Third issue

26.This issue had not been argued at first instance or before the Court of Appeal, as both considered themselves to be bound by the Court of Appeal’s decision in The CMA Djakarta (where permission had been given to appeal to the, then, House of Lords but this had not been pursued).

27.The Supreme Court unanimously confirmed the earlier judgment of the Court of Appeal that the charterers could not have limited their liability (had they been so liable) in respect of loss or damage to the very ship on the basis of whose tonnage limitation was calculated. Lord Clarke gave the only substantive judgment, essentially relying upon the very same reasoning12 as had been relied upon in the Court of Appeal.

Comment

28.The decision of the Supreme Court will be welcomed in terms of the closure that it brings to the first and third issues, particularly in that the orthodoxy of the approaches laid down in The Mary Lou and The Evia (No.2) have been fully confirmed and The CMA Djakarta is now finally confirmed.

29.The differences between the judgments on the second issue will surely be a source of further debate, while the finding may prompt further thought by those drafting or negotiating terms that include provision for joint insurance between owners and charterers. More importantly, insurers will surely give further consideration to the breadth of application in this respect.

The qualification that arises from the authorities, e.g., Morris LJ in The Stork and Sellers LJ in The Eastern City

On Limitation of Liability for Maritime Claims

Relying upon the dicta of Mustill J in The Mary Lou at p278

See para. 55 in the leading judgment (of Longmore LJ) in the Court of Appeal

See para. 43

The relevance of this question having its origins in the judgment of Roskill LJ in The Evia (No.2) at p766

Who did not provide reasons, other than his agreement with Lords Mance and Toulson

See para. 105(1)

See para. 105(1)

Lord Hodge gave no reasons, but agreed with the judgments of Lords Toulson and Mance

At para. 125, Lord Mance also referred to a potentially broader principle, whereby the demise charterer, having an interest in performance, might be entitled to claim damages without proving any actual loss

Per Longmore LJ, who had given the only substantive judgment in that decision